Standing Committee A

[Dr. Michael Clark in the Chair]

Finance Bill

(Except clauses 1 to 3 and 16 to 53 andschedules 4 to 11)

Michael Clark: Before we start today's proceedings, envelopes addressed to members of the Committee are on the Table to be picked up at an appropriate moment. Also, today may be a different sort of day. If changes are made to our programme or times of sitting, we shall do our best through the normal channels to let the Committee know what is happening. Clause 79 Double taxation relief

Clause 79 - Double taxation relief

Question proposed, That the clause stand part of the Bill.

Oliver Letwin: I welcome you, Dr. Clark, to what is likely to be the last day on which the Committee sits. I must say on a personal level what a great relief that is. I do not want to trouble the Committee unduly on the clause, but I must raise one important matter. Before I do so, however, there has been some doubt about the calculation of the mixer cap.
 I have read correspondence about the mixer cap between the Chartered Institute of Taxation and the Inland Revenue, which has largely laid our doubts to rest. Will the Paymaster General clarify, for the record, how the mixer cap is calculated when some part of tax is disclaimed? On the assumption that the Inland Revenue's interpretation of the current drafting is rational and in accordance with its letter to the Chartered Institute of Taxation, I shall rest easy on that point. 
 Although the construct is a vast improvement, it remains rather elaborate. I see the Paymaster General nodding. I am a huge optimist, which is useful when entering a general election period. My optimism leads me to believe that it will in future be possible to rewrite schedule 26. It would be wrong to complain about the drafting of clause 79, which is itself polluted and only one line long.

Dawn Primarolo: Succinct.

Oliver Letwin: The schedule to which it gives effect is less easy to follow. I hope that it will in time be redone on tax law rewrite principles.
 My complaint relates to the dog that does not bark. When the double tax relief saga began last year, a resolution of the problem of subsidiaries that are subsidiaries of subsidiaries was promised as part of the final package. Before I go on, I should declare an interest. I do not know that I have a specific interest, but it is possible that I might. 
 If a UK-based multinational has a subsidiary A in one country and that subsidiary has a subsidiary B in another country and, in order to move to arrangements that are suitable for the type of onshore pooling that is now implicit, the company decides to flatten the structural holding and to reorganise so that both subsidiaries A and B are held directly, a capital gain might be crystallised by the sale of subsidiary B by subsidiary A to the holding company. I envisage circumstances in which there is a 100 per cent. holding at both levels. Clearly, without a genuine third party sale or profit taken, there is no reason for a gain to be crystallised.

John Burnett: Is the hon. Gentleman predicating a circumstance in which the intermediate company effectively steps out?

Oliver Letwin: Yes, I am. It is not a judgment on the part of the intermediate company but rather of the holding company. The mechanism that would be dictated by such a decision is not the stepping out of the intermediate company but the sale by the intermediate company to the holding company of the subsidiary of the subsidiary. We are discussing the sale by the subsidiary of its subsidiary to the holding company. Nevertheless, the effect is exactly as the hon. Gentleman suggests. A direct relationship would be established between the holding company and what had been the subsidiary of the subsidiary. Two possibilities were mooted when the package was originally discussed: exemption from, or rollover relief for, capital gains tax under such circumstances. Exemption is preferable, but either will do. The total package will not work without one or other of the adjustments.
 It is important that the Paymaster General puts something on the record about the Government's intentions. I have little foresight, but in this instance, I know that we will not reach the new clauses that we tabled, in which we advocate particular solutions. I do not place the slightest emphasis on the no doubt inadequate drafting of those new clauses nor do I expect that the Paymaster General will revise the ways and means resolution that will come before the House later today to include new Government clauses in the Bill. However, it would be a great help to everyone if we could at least have a statement from the Government that they will—should they still be in charge of the process—include a clause in the next Finance Bill to enact one or other of the effects that I describe. If, by any happy chance, we were to find ourselves sitting on the Government Benches and in charge of proceedings, there would indeed be such an adjustment. 
 Such an adjustment is needed, and industry needs to know that there will be one. The importance of a statement today is that it will, I hope, give some assurance to firms that need to plan around that over the coming years. I do not want to labour the point, as I hope that I have made myself clear. If the Paymaster General feels that I have left out something about our position that needs to be explained, I shall be delighted to do so.

John Burnett: For clarification, when we talk about A being the top company, B company being a subsidiary of A but overseas and similarly C company, is the hon. Gentleman predicating that B is a 75 per cent. subsidiary of A and similarly C?

Oliver Letwin: It is at least that. In general, we are talking about 100 per cent. holdings. I am certainly not trying to establish an uncovenanted bonus for minority stakes or anything similar, and the Paymaster General would not expect me to do so. I hope that there is common ground between the Government and the Opposition on the principle and that we are simply dealing with an administrative delay. I await with eager anticipation the hon. Lady's statement.

Dawn Primarolo: The hon. Member for West Dorset (Mr. Letwin) referred rather kindly to the elaborate arrangements in schedule 26. For once, I shall go a little further than him by describing them as extremely complicated. He supports the principles around the move to onshore pooling, but made a specific point about the schedule's drafting in the hope that the provisions would be subject to tax law rewrite. I am sure that they will be at some stage, although that might be a long way down the track. Clearly, onshore pooling is a complicated part of tax arrangements. The United States of America, for instance, has about 1,000 pages of legislation for a system that is—dare I say it?—more complicated than ours.
 Notwithstanding what the tax law rewrite will do, we intend to have further discussions with business to focus specifically on the delivery of the principles of onshore pooling and to consider the most straightforward way of delivering it. Without question, there will be further improvements in that area of tax, not to change the arrangements but to move towards clearer legislation, certainly as a first step. I was going to say that the legislation will be simplified, but that would be a misuse of the word ``simplified'' because the matter is so complicated. The hon. Gentleman will have felt that, as I certainly did, in examining schedule 26 over the weekend. It must be read in conjunction with last year's arrangements. It has to be read in conjunction with last year's arrangements. I am sure that there is room for improvement. We had intended to consult on some wider issues on company taxation in June, or whenever it may be feasible. The double tax improvements will be part of that. Like the hon. Gentleman, I should like to see a rewrite but there is room for improvement before that. 
 The Charted Institute of Taxation wrote to the Inland Revenue on 18 April and it responded on 26 April. That is the correspondence to which the hon. Gentleman referred. A follow-up query from another representative body was also received recently. The Revenue is happy that the drafting supports the interpretation that both it and business would expect: the tax that is excluded from a chain for credit relief will not endlessly recycle in the mixer cap formula to the detriment of the taxpayer. That is where to avoid triggering the cap lower down the chain the company can disclaim on what might be a smaller surplus. In the case of subsidiaries, as the hon. Gentleman rightly says, there is no reason why the cap should be triggered. It is unclear why that should be done. The double taxation arrangements meant that multinationals used offshore holding companies to avoid capital gains tax on the sale of the subsidiary. The hon. Gentleman is referring to other possibilities as a result of the changing legislation. 
 I need to take a little more advice before giving the hon. Gentleman a specific undertaking about rollover relief and exemption. The Government are consulting on changes to the tax on gains made by companies and disposals of substantial share holdings with a view to introducing either a deferral or an exemption. A gain made in a foreign company would be subject to foreign rather than UK tax rules. Instead of making a commitment here today, I shall flag up for the Committee the appreciation of the two points that the hon. Gentleman makes and the need for those consultations to take place in the context of changes to tax on gain.

John Burnett: Will the Paymaster General address my point about the meaning of ``subsidiary'' for the purpose of the Bill? If she replies in writing, that is all well and good.

Dawn Primarolo: I am extremely grateful for the hon. Gentleman's second sentence. If I write to him, I can be sure that I have the correct clarification. I was not aware that there was a problem there but I am happy to write to him and to circulate my letter to all members of the Committee. I undertake to do that as a matter of priority so that the matter is cleared up properly.
 Question put and agreed to. 
 Clause 79 ordered to stand part of the Bill. 
 Schedule 26 agreed to. 
 Clause 80 ordered to stand part of the Bill.

Clause 81 - Life policies, life annuity contracts and capital redemption policies

Question proposed, That the clause stand part of the Bill.

Howard Flight: Clause 81 is the result of considerable work between the industry and the Inland Revenue to remove anomalies in the law and give policyholders greater certainty about their tax position.
 Introducing the new requirements by April 2002 will involve insurers in a large task. There is a new rule that insurers must advise the Inland Revenue, not when a potentially taxable gain has arisen, but where there is a large gain; insurers will therefore have to separate out what is deemed large. Dealing with that efficiently over a one-year period could create problems, although it would not do so in the longer term. It might be helpful if the threshold for reporting to the Inland Revenue were optional for the first year. 
 The main point of the clause is to clarify the position where an insurance policy is held jointly and transferred into the sole name of one of the holders prior to the 10th anniversary of commencement. The transfer is then taxed as if part of the policy had been cashed in early. The key question is whether the clause and the relevant parts of the schedule will impose a new stealth tax on divorce where a policy supporting a mortgage is transferred into a sole name because only one of the parties is henceforth responsible for the mortgage. While we may be in favour of fiscal incentives in support of marriage, we are not in favour of fiscal stealth tax because people have the misfortune to get divorced. If, as we have been advised by various parties in the case, that is the impact of the Bill, the clause will have to be amended and should not be passed in its present form. It would be useful if the Minister could assure me that that will not be the effect in the event of divorce.

John Burnett: I have a small drafting point that the Law Society has raised with me, in relation to new section 546A.

Howard Flight: I think that that is covered by amendment No. 44 or 45.

John Burnett: I am grateful to the hon. Gentleman. In that case, I shall wait for the matter to come up in due course.

Michael Jack: This is a complex area of tax. The tax treatment for life assurance policyholders normally goes on autopilot, which is why the clause and its associated schedule deal with activities that must be undertaken by life assurance companies. Could the Minister say how things will be communicated to taxpayers so that they can know with certainty where they stand if they are either the holders or the recipients of a life assurance policy? Is that dealt with by clause 81?

Melanie Johnson: The hon. Member for Arundel and South Downs (Mr. Flight) seems to believe that the legislation changes the current position, but it will simply bring clarity to a confusing and unclear situation. We have always taken the long view that, in a transfer of interest in rights under a policy, the clear legislative intent is that what is transferred is only a part of the beneficial interest in the rights under the policy. In fact, difficulties have arisen because in transfers of interest in law, there are different ways in which co-owners may hold the rights under the policy. In England, Wales and Northern Ireland, those differences bring uncertainty to the tax treatment of a part transfer. The tax treatment of such a transfer in Scotland is certain and accords with the original legislation's intention. The measure will bring clarity to an unclear situation and help both the industry and individual policyholders.
 A small gain in tax is projected as a result of the change, but only because of better communication between the life industry and policyholders, which will lead to greater compliance in self-assessment forms. That is the only way in which any tax change will result from the measure; there is no hidden tax, as the hon. Gentleman suggested there might be. Indeed, the tax charge on changes in the ownership of life policies has existed since 1968, so there is no intention to change the overall position. 
 If the assignment is exempt before the change, it will remain so after it. In fact, the measure introduces a new exemption if the share in the policy is gifted. It appears that the charge does not apply consistently, even though no relevant distinction in economic terms results from the different interpretations and forms of ownership. The clause and the schedule will bring consistency and certainty of treatment for insurers and policyholders alike, and I hope that that clarifies the position for the hon. Gentleman. 
 The right hon. Member for Fylde (Mr. Jack) asked what communication there would be. I can let him know in more detail, but the basic idea is that there should be an annual statement from the insurance company to policyholders to give them a much clearer understanding of what is happening and, by providing them with the necessary figures, to help them to complete their self-assessment tax forms. If that is not sufficient detail for the right hon. Gentleman, I will write to him with further information.

Howard Flight: I will expand a little on my point, because the Minister has not effectively placed on the record the fact that the measure will not bring a tax charge on divorce. Hon. Members should imagine a situation in which joint assets are split so that the wife keeps the family house subject to a mortgage and the endowment policy to cover that mortgage, while the husband retains immovable assets. In the past, it has been unclear whether and to what extent there is a chargeable gain on the transfer of the life policy from joint ownership to the ownership of one party. In most cases, the assignment escaped tax. The measure is an improvement on the current position, which is confusing, but the matter could have been more sensibly addressed than it is by the clause and schedule.
 The schedule confirms that if a qualifying policy is transferred from joint ownership to that of one party, and the transfer occurs before the 10-year point, there will be a chargeable event, and it clearly identifies who should pay the tax. If the parties had remained married and the policy had been held beyond the 10-year hurdle there would have been no tax liability. In the vast majority of cases, when an insurance policy backs a mortgage, the remaining owner of the policy continues to pay the premium for the life of the policy. It would be simpler, more straightforward and more reasonable to ignore the transfer on divorce or separation and to make any tax change crystallise only if the policy is cashed in within the 10-year period by the party who ends up holding the policy. As drafted, however, the clause will impose a windfall tax on divorced or separating couples that would not arise if the couple stayed together.

Michael Jack: I thank the Minister for her clear answer to my question. I am glad that companies will advise taxpayers on the basis of the information that she has mentioned.
 Some small polices—small in financial terms—will be caught by the clause and the schedule. I am anxious that someone who may have no knowledge of these matters, and, unwittingly, may not complete a self-assessment form—he may in the end be a non-taxpayer—will suddenly be informed that he has a tax liability. What is being done about people who are not subject to self-assessment, who are non-taxpayers or who may unwittingly get the notice and worry about what they have to do if they are caught up in these arrangements?

Melanie Johnson: On the latter point, the form of communication has not yet been decided; it is too early to say exactly what will be sent out. However, I understand that it will cut the red tape involving insurance companies and give clearer information to policyholders about their gains and about the related tax. I shall be happy to listen to the right hon. Gentleman's representations if he has cause for concern in the future. He would agree that it is right in principle for all insurers to tell policyholders about their gains; that is the principle that underlies the proposal. The Association of British Insurers, which represents the insurance industry, already supports that policy.
 Insurers cannot know whether there is tax to pay on a gain, however small it is, as that is a matter for the individual. The gains could affect an individual's entitlement to an age-related personal allowance, and may fall to be taken into account when calculating the level of tax credits. These are matters for us to consider as individuals when completing our self-assessment forms, or when deciding whether we need to make a return if we are not automatically subject to self-assessment. There is no reason for a gain to fall outside tax just because it is small; such matters must be dealt with on an individual basis, as is proper. 
 I make it clear to the hon. Member for Arundel and South Downs that what is proposed is not a new tax on divorce, although I am intrigued by the Opposition's anxiety about it. There is an existing tax charge when there are changes in the ownership of life policies, whether or not they are part of a divorce settlement; nothing is being changed in essence. The charge could be different, but it is not new. 
 The measure removes uncertainty about what and who is chargeable. No changes are being made in respect of Scots law. The only differences cover the ambiguities that have emerged in England, Wales and Northern Ireland, where at present there is considerable uncertainty; we are clarifying matters and bringing that uncertainty to an end.

Michael Clark: The debate on the clause is going a little more slowly than I had anticipated, and members of the Committee will have to be quick if they want to catch the tea trolley, which is outside the Committee Room now. However, I remind the Committee that the quorum remains at 10—11 including the Chairman.

Howard Flight: Will the Minister confirm that the effect of the clause and the schedule in cases of divorce is as I explained? If so, at the very least I ask the Government to reconsider along the lines of my brief suggestions. Previously, there was a lack of clarity, as the Minister said, but as clarified, the proposal now highlights what seems to be an unreasonable tax on divorce.

Melanie Johnson: There are no general rules that ease the impact of tax charges that may arise in consequence of a divorce, and it is doubtful whether such rules would command universal support. However, the measure will make the treatment of policy assignment, whether on divorce or otherwise, clearer. When joint property is being divided, the measure will make it easier for parties to attribute a correct, and therefore fair, value to the life policy. That is a matter for the arrangements between the parties concerned in individual situations; it is difficult for us to generalise. I shall write to the hon. Gentleman if he has further questions.
 Question put and agreed to. 
 Clause 81 ordered to stand part of the Bill

Schedule 27 - Life polices, life annuities and capital redemption policies

Howard Flight: I beg to move amendment No. 43, in page 226, line 41, after `jointly', insert `or in common'.
 This is the matter that my hon. Friend the Member for Torridge and West Devon (Mr. Burnett) was about to raise in respect of clause 81. As the Minister said, the changes, especially section those in proposed new section 546A, are designed to align English and Scottish law when an insurance policy— 
The Chairman's attention having been called to the fact that ten Members were not present, he suspended the proceedings; and other Members having come into the room and ten Members being present, the proceedings were resumed.

Howard Flight: As I was saying, section 546A in particular is designed to align English and Scottish law when insurance policies are held by more than one person. Subsection (1)(a) of the proposed new section refers to policies held jointly or in common, but subsection (1)(b) refers only to policies held jointly. The Law Society's opinion is that some words have been missed out of paragraph (b), which should similarly say ``jointly or in common''.

Melanie Johnson: The amendment would not have any effect, as existing legislation has the desired result. As the hon. Gentleman said, the measure relates to the application of the complex principles of property law to life insurance policyholders. Some whole assignments will be deemed to be assignments of a part for tax purposes. It covers assignments and insurance contracts where, economically, only part of the contract is transferred. It is not necessary to deem something to be a part assignment when it is already a part assignment in law.
 The amendment deals with the transfer of an insurance contract by tenants in common when not all the tenants dispose of their interest in law. This is an assignment of a precise part of the contract by each tenant to reduce his own interest in the contract. It does not therefore need to be deemed to be a part assignment for tax purposes. The amendment is unnecessary and I urge the Committee to reject it. 
Mr. Burnett rose—

Michael Clark: This will be a speech, not an intervention, I believe.

John Burnett: It will, Dr. Clark, but the Committee will be relieved to hear that it will be a fairly short one.
 I hope that I can remember my co-ownership rules from years past. If I remember correctly, in terms of legal ownership—equitable or beneficial ownership, as mentioned in the clause—only joint tenants or tenants in common are relevant. It is plainly defective not to allow for that, so I join my hon. Friend—as he kindly called me—the Member for Arundel and South Downs in supporting this important amendment. Without it, there will be confusion and unfairness when the transferee holds as a tenant in common. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 5, Noes 12.

Question accordingly negatived. 
 Schedule 27 agreed to. 
 Clause 82 ordered to stand part of the Bill.

Clause 83 - Deduction of tax: payments between companies etc

Howard Flight: I beg to move amendment No. 44, in page 56, line 14, at beginning insert
 `If the Board reasonably believes that neither of the conditions set out in section 349B is satisfied then'.

Michael Clark: With this it will be convenient to take Government amendment No. 50.

Howard Flight: The clause is the fruit of much consultation by the Revenue, and it is generally welcomed by the accounting industry. However, there is a slight concern that taxpayers who, in accordance with the Revenue's guidelines, conscientiously check the status of their payees, could be liable for their payees' tax if it subsequently transpires that, contrary to all appearances, the pay is not within the charge to corporation tax. The payer can never know for sure that the pay is within the charge to UK tax. Only the Revenue will know that.
 The clause is allegedly a deregulatory clause to remove the requirement to withholding tax on certain payments between companies where the requirements of new section 349A are satisfied, but new section 349C gives the Revenue an arbitrary power to overrule that and instruct a company to resume paying withholding tax. That surely cannot be right, and there should be a requirement for reasonableness by the Revenue. That is what amendment No.44 is designed to achieve, and I believe that it is also the objective of the undoubtedly more perfectly drafted Government amendment.

Melanie Johnson: I can confirm that the Government amendment is intended to achieve the same objective as amendment No. 44. Were things different, we might have introduced this amendment on Report, but as there are drafting problems in the Opposition amendment, it seemed sensible to do so now.
 Amendment No. 44 was intended to spell out that the Board should give directions only where it reasonably believed that the conditions for making the payment gross were not satisfied. We agree that the Board's power should be limited in that way. We believe that it was implicit in the wording, but we accepted that it was desirable to make it explicit. Some aspects of the drafting of amendment No. 44 would have frustrated the purpose of new section 349C, so we tabled an alternative form of wording that achieves the desired result. I hope that the Committee can accept our amendment.

Howard Flight: I am more than happy to substitute amendment No. 50 for amendment No. 44. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendment made: No. 50, in page 56, line 20, at end insert— 
`( ) Such a direction shall not be given unless the Board have reasonable grounds for believing as respects each payment to which the direction relates that it is likely that neither of the conditions specified in section 349B will be satisfied in relation to the payment at the time the payment is made.'. —[Miss Melanie Johnson.]

Howard Flight: I beg to move amendment No. 45, in page 56, line 25, leave out `Where' and insert
`This section applies where—
 (a) an application has not been made under section 349E, or
 (b) an application has been made under section 349E and the Board have
 refused to give notice that they are satisfied as required in subsection (1) of
 that section, or
 (c) an application has been made under section 349E and within 30 days of
 that application being received by the Board a payment of the nature
 mentioned in subsection (2)(a) is made.
 (2) Where this section applies and'.

Michael Clark: With this it will be convenient to take amendment No. 46, in page 56, line 41, at end insert—
 `349E. (1) The Board may, on the application of a company in the situation mentioned in section 349D (2)(a), notify that company that the Board are satisfied that the conditions in section 349B are satisfied.
 (2) Any application under subsection (1) above shall be made in writing and shall contain such particulars as are relevant and known to the company making the application and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.
 (3) The Board shall notify the applicant of their decision within 30 days of receiving the application or, if they give a notice under subsection (2) above, within 30 days of the notice being complied with.
 (4) If the Board notify the applicant that they are not satisfied as mentioned in subsection (1) above or do not notify their decision to the applicant within the time required by subsection (3) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (2) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (1) above as if it were a notification by the Board.
 (5) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (1) shall be void.'.

Howard Flight: These amendments try to correct the main points of concern about the new section that have been widely raised by lawyers and accountants. If a company in good faith pays without withholding tax, in other words it pays gross, and it subsequently transpires that that was incorrect, the Inland Revenue can recover the tax from it and in a sense it will lose out twice.
 The provision effectively requires companies to police the tax affairs of people to whom they pay interest, annuities and royalties and to take the risk that they have not been provided with adequate and truthful information. Surely the Government should issue guidelines about what companies can rely on in deciding whether to withhold. They should provide a safer harbour than the clause provides. 
 The amendment would cure the defect by incorporating a fast-track clearance procedure, which would protect public revenue and withhold protection from a company that put in an application and immediately paid interest gross, to prevent applications for clearance from being used to further tax avoidance. The wording is modelled on an existing successful clearance procedure—capital gains tax rulings on corporate reorganisations under section 138 of the Capital Gains Tax Act 1979. The Law Society and the Chartered Institute of Taxation strongly support the need for a clearance procedure.

Melanie Johnson: In proposing amendments Nos. 45 and 46, the Opposition have made some play of the need for a clearance system to facilitate the operation of the regime introduced by clause 83. I am not clear on whether they think that the new regime is inoperable without a clearance system or whether such a system would slightly improve its workings. In either case, the Opposition's view is misconceived. The regime is not unworkable without a clearance system, and such a system would not improve the way in which the new rules work. In fact, it would place new burdens on business and reintroduce the bureaucracy that we have been so keen to avoid. I believe that the hon. Gentleman is also keen to avoid that.
 Let me explain the situation in more detail. The clause is intended as a deregulatory measure and will cut red tape. It responds to calls that we have received to build on the reforms that we announced last year by lifting withholding tax on payments made between companies where the payment would be taxed anyway in the hands of the recipient. In making that change, it has always been the Government's view that the new system should be as light-handed as possible. That is why the new rules do not set an objective test, which would often be difficult for a paying company to verify. Instead, they simply require a paying company to act on its reasonable belief that the conditions for gross payments are met. A clearance system would place new burdens on business and the Revenue. 
 To protect the Exchequer, we have consistently taken the view that if it turned out that the tax was not deducted when the recipient was not in the categories entitled to gross payment, the Revenue should be able to recover its tax from the payer. We have recognised that payers would want to take steps to protect their position in the event of a Revenue claim for tax, but we believe—and have been told—that it will be perfectly possible for payers to do so by a system of indemnities as part of their normal contractual arrangements. 
 The Opposition's proposal to include a clearance system therefore runs completely counter to the clause's intention. It would not match the deregulatory objectives of the new regime, but would place significant burdens on the Revenue that we had not anticipated as part of the measure. It would also place burdens on business, because if a clearance system were instituted, everyone would feel bound to use it, perhaps incurring additional professional charges in the process. 
 A clearance system cannot give the sort of guarantees that the Opposition think it could. For example, if paying companies seek comfort from the Revenue because they have doubts about whether the recipient is the beneficial owner of the income to be paid, the Revenue will often be unlikely to have access to all the information that it needs to answer those doubts. As we announced on Budget day, we shall continue to work with the markets in developing guidance for the operation of the new rules. We are consulting on the need for and nature of any further guidance that the Revenue should produce. In that way, the Government can facilitate the regime's operation. 
 The amendments seem to contain flaws and would not achieve the Opposition's objectives. The result is that section 349D would apply in some circumstances when the Opposition wanted to disapply it; in other circumstances, it would not apply when the Opposition would presumably agree it should apply. For all those reasons, the proposals are unsatisfactory. I hope that I have explained the difficulties and that the Committee will reject the amendments.

Howard Flight: We claim not that the clause is inoperable without the amendment but that it is unreasonable for there to be no clearance system or some form of safe harbour. If a clearance system is not acceptable, could the Minister say more about the type of safe harbour guidance that the Revenue intends? It would be unreasonable to place paying companies at risk of having to account for tax when they have taken reasonable steps to check that recipients were within the charge to UK corporation tax. While it may be wrong and unrealistic to prescribe exactly what evidence a paying company should obtain, there should surely be some form of safe harbour guidance and companies that have made specified checks should be safe from potential subsequent claims for tax and penalties. Whatever guidance the Revenue produces needs sufficient status to give that safe harbour. Companies within the safe harbour should be safe from having to account for tax and from penalties. If that approach were taken, there would be no need for clearance as an alternative.

Melanie Johnson: I cannot help the hon. Gentleman greatly in that regard. The Revenue placed initial guidance on the website when the Bill was published. As I said, we will continue to work with the market to provide guidance. I am not sure about the term ``safe harbour guidance'' because I am not sure that we can provide safe harbours. However, we are committed to producing as much further guidance as possible, by working with the market. It would be premature for me to go into any more detail but I hope that the hon. Gentleman registers the fact that there are difficulties in taking a different approach and that we are doing what we can to make the legislation as straightforward as possible for those who are operating it. The fact that it is a deregulatory measure is a real gain to the industry.

Howard Flight: The Minister's comments are helpful but not helpful enough. The points were raised by the Law Society and the various accounting bodies. If a paying party has done its homework to ascertain whether it should stop withholding tax and there is a problem that it has not caused, it would be unreasonable for the Revenue then to charge it withholding tax and a penalty. I do not know about a safe harbour or a safe haven, but it should be made clear under the new streamlined arrangements—which are broadly welcome and the result of constructive discussion—that the Revenue do not intend to act unreasonably in situations where companies have been conscientious and professional about ascertaining whether they should be stopping tax.

Melanie Johnson: In some situations the measure can clearly work and in others it cannot. There will be areas in between—which is what the guidance relates to. As I said, the Revenue will often not have the information to provide the certainty that the hon. Gentleman seeks. In such circumstances, the companies concerned will have to operate on the basis of reasonable belief, and people must decide what they will do about that. Market operators who wish to protect against the Revenue making claims such as those mentioned by the hon. Gentleman might do so by seeking indemnities from those to whom they make such payments, but just on the basis of contractual arrangements between the concerned parties. I envisage that happening in some of the situations on which the hon. Gentleman seeks greater certainty.

Howard Flight: The point is well aired and not worth pressing to a Division. However, it is an operational issue and, if the new arrangements are to work satisfactorily, the industry and the Revenue will have more work to do to reach a common understanding of what I would broadly call safe harbour situations. If, as the Minister said, the complications and expense of indemnities are necessary, they should be kept to a minimum; otherwise, the measure will not be deregulatory. Having aired the point, I will seek leave to withdraw the amendment.

Oliver Letwin: I just want to set the record straight, because I misled the hon. Member for Torridge and West Devon in responding to his question on 75 per cent. holdings on double tax relief. Having re-examined my papers, I want to place on record the fact that the exemption or rollover ought to apply to any substantial shareholding. One could argue about how big a substantial shareholding should be, but I was wrong to say at least 75 per cent. and I apologise to him and to the rest of the Committee.

John Burnett: I am grateful for that clarification.

Howard Flight: I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 83, as amended, ordered to stand part of the Bill. 
 Clauses 84 to 86 ordered to stand part of the Bill.

Schedule 28 - Amendments to machinery of self-assessment

Howard Flight: I beg to move amendment No. 47, in page 243, line 27, after `jointly', insert `or separately'.
 We broadly welcome the reforms in the machinery of self-assessment, as does business generally. Three amendments have been tabled to the schedule and they deal with specific points on its impact and interaction with previous legislation. Amendment No. 47 would change the part that deals with disputes on self-assessment and related litigation between taxpayers and the Inland Revenue. The procedure is commenced by a notice of referral to the special commissioners, but that must be given jointly by both sides. If they are already in dispute over another matter, why is it necessary to include a requirement for both sides to agree? Surely it would be more sensible to allow either side to start the process. 
 I want also to ask a question that others have posed, which is related to amendment No. 47. Why is the process reserved for the special commissioners and not included for the general commissioners?

Dawn Primarolo: Schedule 28 provides for some changes to the self-assessment procedure. I will explain why we undertook them, before responding specifically to amendment No. 47.
 The Government received a report on tax inquiries, as part of a consultation that was carried out jointly by the Chartered Institute of Taxation and Inland Revenue. The report's findings were widely discussed with the main representative bodies. The exercise was an excellent example of co-operation, and it has enabled the Revenue to improve the service that it provides to the taxpayer. I want to make it clear to the hon. Gentleman that I specifically requested that any proposed changes were agreed by all, because the aim was to tidy up the process. Given the views that have been expressed about self-assessment, I wanted to ensure that everyone was in agreement. 
 The measures fall into two main groups. First, it will be possible for the taxpayer and the Inland Revenue to agree to refer a disputed point to the special commissioners, and to the courts if necessary, before the inquiry is completed. I am sure that the hon. Gentleman knows that formal completion of an inquiry can take a long time. The joint report expressed the view that the measure would enable litigation of contentious points while the facts were still fresh and that that would assist in providing the taxpayer with certainty at an early stage. 
 The second set of changes seeks to make income tax return inquiries simpler and more straightforward. There are four stages at present, but there will be only two in future. The Inland Revenue will state its conclusions and make any necessary amendments to the tax return, and the taxpayer will then have a right of appeal. 
 The context of the changes was agreement, so I am a little surprised by the amendment. All representations on the amendments came specifically from KPMG. I hope that the hon. Gentleman will accept that I did all that was humanly possible—as did the Revenue—to ensure that there was agreement on what we believed were uncontentious improvements. His amendment is unnecessary and complicates what is already an involved piece of legislation; hence our moves to try to improve it. The information powers can be used only to obtain information and documents that might be relevant to the tax liability. It is very unlikely that documents relating to the conduct of a referral would be relevant to the tax liability. 
 As I said, the wording of the amendment was suggested in a letter from KPMG. I asked my officials to reply to explain why I thought that it was not necessary. It is extremely unlikely that the protection that the amendment would provide would ever be needed, but if KMPG were able to provide my officials with examples of cases, I would be prepared to consider them further. I am also happy to give the assurance that the Inland Revenue will not use section 20A to obtain documents or information relating to the conduct of a pending referral. 
 The hon. Member for Arundel and South Downs specifically asked about special commissioners. According to the joint study by the Chartered Institute of Taxation and the Inland Revenue, the new right is necessary because substantial and complex matters will benefit from early consideration by the commissioners. It is appropriate for the special rather than the general commissioners to consider such matters. 
 I hope that I have answered the hon. Gentleman's questions and that suitable assurances are now on the record. All Governments are constantly encouraged to consult, and we have consulted widely. We regarded this legislative provision as uncontentious, but three amendments were tabled, and the matters raised were settled through correspondence between the Inland Revenue and the relevant company. I wonder what more it is humanly possible for the Government to do than to introduce a measure that has found agreement; the problems came to light later in Committee. In the spirit of consultation and discussion, I hope that the hon. Gentleman will withdraw the amendment.

Howard Flight: I thank the Paymaster General for her helpful comments. The Law Society as well as KPMG raised the issue. I agree that it is up to those affected to provide significant case evidence to justify pursuing the matter further. The door is open in that respect, so I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 48, in page 249, line 20, at end insert—
 `( ) Before 31st December 2001 the Board of Inland Revenue shall present to the Chancellor of the Exchequer proposals to bring the law governing the procedure on completion of enquiries into company tax returns into line with that which applies for income tax self-assessment purposes as a result of paragraphs 8 to 10 above.'
 The amendment is in no way critical of the changes in schedule 28, which introduces several welcome improvements in the administration of self-assessment for individuals. It is a probing amendment designed to suggest that a similar process could be introduced for companies in respect of corporation tax self-assessment, and to counter the argument that making such changes would mean administrative upheaval. A half-way house and a review is proposed.

Dawn Primarolo: I suggest that the hon. Gentleman withdraws the amendment. He knows full well the differences between income tax and corporation tax self-assessment. The administration and timing is complex. He described his amendment as probing, so he may be trying to ascertain our intentions for corporation tax self-assessment.
 It is too early to judge whether changes to the process and administration of corporation tax self-assessment are desirable. We need to scrutinise how the system works. The Government have not turned their face against reviewing how the corporation tax self-assessment inquiry has bedded in, and whether that, too, could do with some tidying up. For many reasons, however—one being that we are considering the Finance Bill at the moment—the time is not now. Given that I have said that the Government would want to look at the matter in the not too distant future, I hope that the hon. Gentleman will withdraw his amendment. I am sure that he will want to press us on the subject on future Finance Bills—from the Opposition Benches.

Howard Flight: As I said, this is a probing amendment, tabled so that when we occupy the Government Benches we shall have some idea of Revenue and Treasury thinking about corporate self-assessment. I thank the Paymaster General for her comments, and I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 49, in page 256, line 28, at end insert—
 `21A.—(1) Section 20B of the Taxes Management Act 1970 (restrictions on powers under sections 20 and 20A) is amended as follows.
 (2) In subsection (2)—
(a) after ``any pending appeal by him'', insert ``or any pending referral to the Special Commissioners under section 28ZA of this Act or paragraph 31A of Schedule 18 to the Finance Act 1998 to which that person is a party'', and
(b) after ``a pending appeal by the taxpayer'', insert ``or a pending referral to the Special Commissioners under section 28ZA of this Act or paragraph 31A of Schedule 18 to the Finance Act 1998 to which the taxpayer is a party'', and
(c) after ``a pending appeal by the client'', insert ``or a pending referral to the Special Commissioners under section 28ZA of this Act or paragraph 31A of Schedule 18 to the Finance Act 1998 to which the client is a party''.'.
 This is a technical point that has been raised with me by KPMG. The introduction of the new provisions relating to referrals to the special commissioners extends the protection to taxpayers so that a notice under any of the relevant sections cannot oblige a taxpayer to provide documents or information relating to the conduct of any pending appeal by the taxpayer. However, there is apparently no extension of the protection that currently exists in section 20B of the Taxes Management Act 1970 to take account of the proposed referral procedure.

Dawn Primarolo: I am extremely grateful for the opportunity to speak on this amendment again, Dr. Clark, as I have already inadvertently covered the point, in my rush to be helpful to the hon. Gentleman—

Peter Luff: Characteristically helpful.

Dawn Primarolo: I am grateful to the hon. Gentleman for saying that.
 I inadvertently covered this point in my comments on amendment No. 47. The hon. Member for Arundel and South Downs was characteristically gallant, and did not point that out to me. I therefore refer him to the comments that I made then, and specifically to the assurances about not using section 20 or 20A to obtain the documents or information relating to the conduct of a pending referral. As he was so gracious to accept that as a good explanation in response to amendment No. 47, I hope that he will accept it as an equally good explanation concerning the relevant amendment, and will withdraw that amendment.

Howard Flight: I thank the Paymaster General, both for her kind words and for putting on the record the underlying point, which others have also raised. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 28 agreed to. 
 Clauses 87 to 90 ordered to stand part of the Bill. 
 Schedule 29 agreed to. 
 Clauses 91 and 92 ordered to stand part of the Bill.

Clause 94 - VAT: children's car seats

Question proposed, That the clause stand part of the bill.

Richard Ottaway: May I make a serious point before my right hon. Friend the Member for Fylde, who has several points to make, catches your eye, Dr. Clark? [Interruption.] Does the Paymaster General wish to defer the discussion? If she does, no doubt she will let me know.
 Paragraph 13 of the explanatory notes rightly states that the EC sixth VAT directive permits member states to apply a reduced rate of VAT to children's car seats. What is significant about the clause is that it does not include the Chancellor's much-heralded proposal for a 5 per cent. rate on the repair of churches. The pre-Budget report trumpeted the fact that VAT would be reduced to 5 per cent. on church renovations.

Dawn Primarolo: May I seek clarification, Dr. Clark? I thought that we were considering clause 94, which is about children's car seats.

Richard Ottaway: We are also talking about the EC sixth VAT directive, which is referred to in paragraph 13 of the explanatory notes on clause 94. The Government's much heralded proposal to include church repairs in the Bill has not been made because they have fallen foul of that directive. It is inappropriate for the Chancellor to tell spin-like stories when he has not cleared the proposal with the EC. He made claims that he could not deliver. It is a classic case of the Government being all spin and no delivery. [Interruption.]

Michael Clark: Order. I believe that the hon. Gentleman was just in order, which is why I allowed him to continue. He was right to stay in order for a minimum period, rather than trying to stay in order for a long time, which might have stretched the patience of the Chair. We are talking principally about VAT on children's car seats, but as the hon. Gentleman said, the clause refers to the 5 per cent. reduced rate, in the context of which he referred to churches. We shall now try to return to VAT on children's car seats.

Michael Jack: Lest my criticism of the clause be misrepresented or selectively quoted outside the Committee Room, let me say at the outset that I am in favour of any measures that attempt to reduce child casualties and fatalities. If clause 94 contributes to the saving of one life that otherwise might have been taken as a result of a road vehicle accident, it will have had the right and proper effect.
 I wish to examine the Government's motives for making the VAT change. I am sure that all right hon. and hon. Members know about extremely worthy causes for which value added tax should be changed. For example, along with other local Members of Parliament, I recently attended a discussion with people who were visually impaired. They asked whether there could be a lower rate of value added tax on a range of products that are of assistance to them. Those who represented the Government at that meeting explained why that was not possible. One could give other examples. 
 Paragraph 5.100 on page 100 of the ``Financial Statement and Budget Report'' states: 
 ``Around 6,000 children under eight years old are killed or injured each year on Britain's roads.'' 
Perhaps that statement underpins some of the thinking behind clause 94. The report continues: 
 ``It is vital that child car seats are correctly fitted'' 
and then makes some other observations. However, no connection is made with the Government's assertion in justifying clause 94 that in some way the position of a substantial number of those 6,000 children is affected by car seats. 
 I undertook some research on the subject. I pay tribute to the transport statistics section of the Department of the Environment, Transport and the Regions. I asked what data was collected to measure the impact of child car seats on the road casualty figure and how we might know whether the £5 million a year that the measure will cost is the right way to affect the number of child fatalities. I was told that no data is collected on that matter. I probed a bit further and tried to focus on cars. What do we know about cars? For example, is any data collected to establish whether front-seat or back-seat passengers are affected? General data is collected about where people sit, but it does not reveal anything about the car seat itself. 
 I began to wonder whether the clause was an attempt to improve the quality of child car seats. It attempts to define a child's car seat, but nothing in it differentiates between the good and the bad. In effect, the Government could unwittingly spend £5 million on value added tax reductions on children's car seats on the basis that they are the root cause of saving children's lives, but poorer quality seats would benefit as opposed to better quality ones. 
 What accounts for child fatalities? According to the transport statistics from DETR 
 ``Child pedestrian fatalities account for half of all child casualties, making this the biggest child safety issue.'' 
Clause 94 is a well-meaning attempt to improve the safety of children in motor vehicles but, for whatever reason, the Government have driven straight past the biggest single cause of child deaths. How would we, as Members of Parliament, explain to the parents of a child who has been injured in a pedestrian incident the non-use of the £5 million that the measure costs? That money might have been used to develop strategies for child safety that might have had a beneficial effect. 
 To that end, I examined whether we could justify spending money in that area. In 1990, the Department of Transport produced an interesting document entitled ``Children and Roads—A Safer Way''. It described the scale and nature of child road accidents and set out a strategy to deal with them. It focused on the question of child pedestrians, pointing out evidence that properly funded education to help children develop better strategies to deal with pedestrian safety had a greater effect on child safety matters. 
 To justify the clause, the Treasury must produce solid facts showing that the use of the £5 million is the best way of dealing with child safety matters. I see no statistical evidence from the DETR that that would help. If a child is involved in a fatal car incident, it is because a car has got into a fatal situation not because there is something wrong with the child safety seat. The Government have produced no evidence that the money might be better directed towards car safety issues. The Government's intention was, on this occasion, well meaning but it is not backed up by any facts from the DETR and it ignores children as pedestrians, which is the situation in which the most child casualties and fatalities are caused.

Dawn Primarolo: I presume that it would not be in order for me to answer the question of the hon. Member for Croydon, South (Mr. Ottaway) on annex H of the sixth VAT directive. I will say merely that representations on churches have been and continue to be made to the commission, which is reviewing the sixth directive in January 2003. The Chancellor took the view that a grant scheme would fulfil his commitment to assist churches and places of worship that came within the criteria, while continuing to press the commission to speed up its review before 2003. The grant arrangements are wholly in order and widely welcomed.
 The hon. Gentleman introduced a sour note into what has been a good discussion. I am sure that he is not suggesting that the Government should withdraw the grant scheme to the churches and wait instead for the commission's view.

Richard Ottaway: Perish the thought that I should be considered sour. It was a legitimate point to raise. On a point that will come out in the next clause, it would be helpful if the Minister could tell us whether grants given instead of a VAT rebate are treated as public expenditure? The arrangements have been made accordingly.
 My right hon. Friend the Member for Fylde touched on an issue about which every member of the Committee would be concerned: road deaths, not just of children but of many other individuals. He also raised the point of the many different ways in which we should approach reducing unnecessary deaths—although I consider all road deaths unnecessary. As the right hon. Gentleman has pointed out, cars can be involved in fatal crashes in a wide variety of circumstances. I think that he also raised the issue on Second Reading, when I explained that more than 1,000 children were killed or seriously injured while travelling in a car in 1999. Those figures came from the 1999 ``Road Accident Statistics Great Britain—The Casualty Report'', which I am told was compiled by the Department of the Environment, Transport and the Regions and the Office for National Statistics. 
 A particular issue is the use of appropriate safety restraints in cars. Clearly, the latest safety standards are always the most advanced and therefore the best. As the right hon. Gentleman will know, the standards are appropriate to the age, weight and height of the child. Such restraints can be expensive, so the Government took the view that there could be a reduction of up to £15 on the newer more expensive brands of seats. That is an extremely important contribution to assisting parents who, because of cost, use second-hand older seats and restraints, which are harder to install and not always the safest. 
 The right hon. Gentleman may have preferred the money that is to be used for the measure to be spent in other areas, but the Government believe that the incentive is correct. It is a relatively small amount, and safety is of great concern to us. The incentive forms part of a valuable set of measures also contained in the Budget to assist families with children, particularly small children. On that basis, we proposed a modest but important measure. 
 As the right hon. Gentleman knows, we could not reduce the VAT charge to zero. The lowest level to which we can now go is 5 per cent., and we have used that option. Although I am grateful—believe it or not—for his comments, I hope that he will accept that the Government's decisions are based on the information that we had. The measure's cost is modest, but it will contribute to child safety.

Michael Jack: I am grateful to the Paymaster General for the careful and considered way in which she has responded to my observations, but the facts speak for themselves. According to the source of data from which she quoted, there was one child fatality in a car in 1999 in the age range 0 to one year. At the age of one, there were six fatalities; at age two, there were three; at age three, there were eight; at age four, there were three; and at age five, there were two fatalities. Thankfully, such fatalities in cars are very low.

Dawn Primarolo: The right hon. Gentleman will know that car seats are compulsory for under-threes when they are carried in the front of a vehicle. We seek to address the use for children up to 11 in all parts of the vehicle, but how can we put a price on a child's life? If the use of the relief saved one child's life, I would consider that to have been a good investment.

Michael Jack: I am grateful that the Paymaster General has repeated the second sentence that I uttered in this debate, because it is difficult to adjudicate in such matters where lives are saved. I ask those at the Treasury, when they have a moment to reflect, to re-examine the study by the Transport Research Laboratory in evaluating work undertaken by the universities of Strathclyde and Edinburgh into methods for training young children in pedestrian skills. They will see that, for a small sum of money, a disproportionate gain in the number of young lives that are saved can be achieved. Should there be a Division on clause 94, I will not vote against it. However, what is the best way of spending the money? As child pedestrian safety is not touched by the clause, perhaps the Government will address that in the future.

Dawn Primarolo: The right hon. Gentleman will know that, in many parts of the country, life skills training projects are targeted at the age range to which he referred. They cover safety not only on the road, but in the home and around railway stations and tracks. He will welcome the fact that the Government will make £10 million available during the next five years, specifically to address child pedestrians and how to increase safety by using training and play situations in controlled environments to impress on young people the need to be safe. I hope that he will accept that the clause sits with several other issues that the Government are taking and will continue to take forward.
 Question put and agreed to. 
 Clause 94 ordered to stand part of the Bill.

Graham Allen: I beg to move, That further consideration be adjourned.
 This might be a useful moment to request an adjournment until this afternoon and to inform all Committee members that, should events outside take the expected turn, we would like to convene the Programming Sub-Committee at a time convenient to all members, including yourself, Dr. Clark, and the other Chairmen.

Michael Clark: Thank you, Mr. Allen. We are doing well, and there is every likelihood that the Committee will be concluded by 7 pm on Thursday 24 May as set out in the programme motion.

Peter Luff: How will we know where the Programming Sub-Committee will meet?

Michael Clark: As I understand it, the Programming Sub-Committee will meet in this room at a time convenient for us all. That will probably be 4.20 this afternoon.

Richard Ottaway: How are we to be notified?

Michael Clark: Those of us who are involved will be here at 4.20 pm and, if there is not a Committee, we will do nothing for 10 minutes until the Committee sits at 4.30 pm.
 Question put and agreed to. 
Adjourned accordingly at thirteen minutes past Twelve o'clock till this day at half-past Four o'clock.